11 Tips for Growing Your Farm
“How many of you have sat down and made a list of the two or three or five opportunities that you should be exploring now?” asked Mike Boehlje of those attending a recent Purdue University Top Farmer Conference.
The proverbial pin dropped in that room would have echoed off the walls after the Purdue University agricultural economist posed the question. Boehlje slowly scoured the room, looking for any takers. Slowly and sheepishly, three hands emerged followed by a few seconds of awkward silence.
“So how many of you will think it will stay crappy forever?” he asked to raucous laughter.
That’s a typical reaction. “We have a tendency when economic downturns occur to get so focused on the downside that we ignore the opportunity side,” says Boehlje.
Remember the financial and housing industry meltdown of 2008? Huge can’t-miss banks missed. This left stockholders – and eventually taxpayers – with a monetary mess.
Investors panicked. The S&P 500 stock index cratered from 1,255 points on September 19 of that year to 735 points on February 27, 2009 – a 41.5% decline in just a bit over five months.
Investors, though, who stayed the course and doubled down were richly rewarded. The S&P 500 index zoomed from that gloomy February 2009 low to 2,729 in late June 2018 – a 371% boost.
That’s akin to double-digit-per-bushel corn, soybean, and wheat prices increases from today’s levels occurring in less than a decade. This seems like a billowy blue-sky dream, considering current commodity prices.
Then again, who in 2002 ever thought farmers would be selling $7-per-bushel corn and $15-per-bushel soybeans in 2012’s farming bonanza?
Up and Down Times
Ray Gaesser started his farming operation with wife Elaine in Iowa during the glory days of the late 1970s, just before the farm economy crashed in the 1980s.
“In hard times, we learned a lot of things,” says the Corning, Iowa, farmer. “I learned that ag is cyclical, that there are ups and downs.” In up times, Gaesser says farmers need to think about the down times and vice versa when the economy is down.
Adversity brings opportunity, he says. He and his family grew the farm during the mid-1980s through the early 2000s, during times of tough farming profitability. Rather than grow during the boom times of 2007 to 2013, they paid down debt.
Even though prices skim below break-even prices for many, bullish signs in agriculture exist.
In Casey Hook’s area around Lake City, Arkansas, farmland prices have moved opposite of slumping grain and oilseed prices, he says.
That’s backed by University of Arkansas farmland reports that have showed an average annual 9.3% uptick since 1998. A decline only occurred in one year – 2009 – at 3.3%.
“A lot of people are betting on agriculture right now,” says Adrian Percy, who heads research and development for Bayer Crop Science.
Companies ranging from IBM to Google to venture capital companies are pumping money into agriculture. During the second quarter of 2017, the U.S venture community committed a record $530 million to agtech start-ups, according to a 2017 Agtech Investment Review by Finistere Ventures.
It’s scary to zig while everyone else zags. Done improperly, farm expansions can end up in bankruptcy court and cause family heartache. That’s why family members need to have a heart-to-heart talk about the farm’s goals before growing the farm.
“We ask borrowers what the plan is for the farm five to 10 years into the future,” says Bill Johnson, president and CEO of Farm Credit Mid-America. “A big part of the future is if they will have children who plan on coming back to the farm.”
In-depth family discussions can also reveal the upsides and downsides of working with family, says Boehlje.
“You can say, ‘Well, I don’t have employees, but I do have kids,’ ” says Boehlje.
In essence, family members are often harder to manage than employees, he adds.
“You can tell the workforce what to do and they might not like it, but try doing that with a spouse,” he says.
Following are 11 considerations and tips for growing your farm.
1. Decide Whether to Buy or Rent
While growing up in Kansas, David Widmar was always stumped by a neighbor who seemingly didn’t make money but stayed on the farm.
“He had old machinery,” says Widmar, an agricultural economist and cofounder of Agricultural Economic Insights. “He was the last one to plant and the last one to harvest, and he never was effective spraying the weeds in his fields.”
So how did he stay in business? He owned his farm. “He rode the increase in his assets (land), so he was in a good situation when he decided to retire,” Widmar says.
Remember that when it comes to growing a land base. Growing a farm through cash renting doesn’t require as much capital. Conversely, farmers may be locked into high rents that don’t reflect reality.
“Cash rental rates tend to be pretty sticky and tend to lag pretty badly compared with farm finances,” says Jim Mintert, a Purdue University Extension economist.
Renters – particularly smaller ones – also tend to have dicey finances. A 2017 Purdue analysis by Boehlje and Michael Langemeier, a Purdue agricultural economist, examined 550-acre farms with a 25% debt-to-asset ratio. The analysis found that 75% of the farmers who owned 85% of their land had a positive cash flow. Meanwhile, just .3% of those who owned 15% of their land had a positive cash flow.
“If you own your own land, who do you pay rent to?” asks Jason Henderson, who heads the Purdue Extension Service. “Yourself.”
This also provides farmers with an asset.
“Those who expand (almost exclusively) with cash rent cannot fall back on their own land when times get tough,” adds Langemeier.
Farmers borrowing money to buy land may find the Federal Reserve Bank’s latest interest rate hikes to be a complicating factor. With two hikes already this year, it’s likely that interest rates will be .75% higher at year’s end than they were at the start of 2018, says Farm Credit’s Johnson.
Yet, interest rates are still at historic lows. “It’s a great opportunity to lock in long-term fixed interest rates,” he says.
2. Try Custom Farming
Gaesser was a newlywed when he and wife Elaine left the small Indiana farm he grew up on and moved to Iowa. Gaesser had fallen in love with the state after he traveled there from Indiana in 1974 to visit the Farm Progress Show. He and Elaine perused state newspapers and eventually bought 240 acres on contract with the owner and rented an additional 320 acres near Corning in the southwestern part of the state.
Besides renting that initial farm, he also custom farmed.
“I got to know the landlords that way,” he says.
Gradually, this worked into more land rentals and purchases. Their son, Chris, along with daughter Jennifer, rented 160 acres as a college funding source. Jennifer now teaches at Atlantic High School in Atlantic, Iowa. Chris became a seed company agronomist and helped on the farm.
In 2010, Ray and Elaine made a contract with Chris to purchase into the farm at a 5%-per-year clip. In 2019, the plan is for them to be 50-50 partners.
3. Build Working Capital
Farm growth requires adequate cash on hand (working capital). Warren Buffet knows all about that.
“His balance sheet is $100 billion cash,” says Widmar.
That gives him prolific cash to access opportunities, as happened during the 2008 financial meltdown.
“Goldman Sachs asked, ‘Do we have enough equity with lower net income and values down from all of our toxic assets?’ ” says Widmar. “So, the company picked up the phone and called Warren Buffet. He paid $5 billion for a stake in the company. That also provided Goldman Sachs some cushion to help weather a slowdown.”
Granted, few can match Warren Buffet’s treasure chest. Yet, it shows the importance of having working capital.
“The value of cash is for risk mitigation, not the return on it,” says Purdue’s Boehlje. “It’s the first line of defense against financial stress. It gives you a buffer if things don’t go well.”
Working capital can help make that once-in-a-lifetime opportunity (such as that 80 acres that borders a farm) a reality.
4. Improve Existing Farmland
An option to procuring more land is to improve existing land.
“We don’t have lots of opportunity to buy more ground,” says J.R. Bollinger, Sikeston, Missouri. “We have to make more off the acres we have.”
It all starts with sound soil fertility, he says. He’s applying lime to decrease the soil acidity that hampers nutrient uptake. “We also are applying more split nitrogen (N) applications,” says Bollinger. Spoon-feeding N enables crops to use N when it’s needed, he says.
“With lower prices, it’s tempting to cut back on P (phosphorous) and K (potassium),” says Mike Gaul of Strawberry Point, Iowa. “You can see it with soil tests coming in from the Midwest. P and K levels are coming down. Huge crops are being taken off, yet producers are putting on nutrients for 180-bushel corn the way they always have. High P and K levels will continually pay you back.”
Meanwhile, livestock provides Gaul with manure that helps build up soil fertility levels.
“If soil fertility is correct, it can take care of a lot of problems,” he says.
5. Scale Back?
Ever feel a bit inferior at your high-school class reunion when it comes to who farms the most acres? Fairly or not, the amount of acres farmed is often the yardstick of a successful farmer.
“Some of those acres may be low-producing and could be dragging down the rest of your farm,” says Johnson. Now’s the time to see if scaling back some of those acres could position you to buy better farmland in the future, he says.
In other cases, those low-producing farms may pay dividends if bought at a bargain price and steps are taken to improve factors like drainage or soil health.
“We can’t afford ice-cream land,” says Hook. “When we’ve picked up land, it’s often the land that no one else wanted. My dad always said, ‘Let’s try it and make it profitable.’ ”
6. Consider Off-farm Capital
Thinking about expanding your farm, but you don’t have the cash?
Technology companies take care of this by seeking outside cash.
“Say you are Elon Musk, who had an idea to build an electric car (Tesla). He sat down with investors to see about putting money into the business,” says Widmar.
The idea isn’t foreign to agriculture. Purdue’s Mintert recalled a farm his grandfather almost lost in the winter of 1933.
“He went in to renew the note, and the bank said no,” he says. “So, he went to family members and got outside contributions, and that is how he saved the farm.”
7. Page Casey Stengel
It would be great if your banker would say about your farm what Casey Stengel said when he began managing the New York Yankees in 1949: “There is less wrong with this team than any team I have ever managed.”
In reality, all farms have their weak spots that can threaten growth. The most common one Johnson sees is financial record keeping.
“Accounting on an accrual basis helps you understand how much money is going in and out,” he says. “If you had that information on at least a monthly basis, your conversations with your banker would go up a strategic level.”
Accural accounting also makes it easier for farmers to benchmark their farms’ balance sheets against others, he adds.
Johnson has noticed that high-performing farmers also tend to do a little better in all areas.
“They are the upper one-third of production and marketing among farmers, and make good factual decisions, he says. “They tend to make better (agronomic) decisions based on soil tests, and they have better records on seed. They also fine-tune things a bit more.”
8. Establish SOPs
“I don’t know any manufacturing business that doesn’t have SOPs (standard operating procedures),” says Boehlje. Even though farmers don’t have brick-and-mortar businesses, they are engaged in biological manufacturing, he says.
For example, changes in the weather can postpone a field operation such as spraying.
“SOPs can help you form a contingency plan,” says Boehlje. “Before a crisis hits, you can go to plan B rather than asking, ‘What do we do now?’ ”
9. Buy Better
This summer’s crop price slump shows that farmers have little ability to control prices. What they do have more control over, though, is the prices they pay for inputs. This contribution to fiscal stability can provide the framework to grow a farm.
“You have to have a procurement mentality where you have more control over what you buy and what you pay for inputs than for what price you sell your product,” says Boehlje.
Growing your farm also requires making smart decisions about what works and what doesn’t work.
“One thing about tight economics is it makes you tighten your belt,” says Gaul. To better ferret out which products work and don’t work. Gaul relies on on-farm test plots and third-party data.
Using such sources can help farmers and analyze products that accompany hot trends like soil health, says says Sean Evans, Monsanto technology development manager. The latest entry in this space are microbials touted to help soils function better.
“Look at the number of times studies were replicated and what sort of conditions the trials were conducted under,” he says. “If you can’t access data, that tells you something. Multisite, multiyear data is really important.”
You may glean discounts through bundled seed and chemical marketing programs. Yet, these savings can pale if the purchased products aren’t matching up with weed populations in individual fields.
“Are you willing to live with yield loss and an increased weed seedbank?” asks Bill Johnson, Purdue University Extension weed specialist.
10. Invest in Pocketbook-Padding Technology
Money that farmers spend on new technology can end up saving them money in the long run.
Michael Koenig, who cofounded ScoutPro, an Urbandale, Iowa, firm, says farmers using the firm’s scouting app can help them show landlords expected crop-production levels.
“It can show areas that need better drainage or where lower production areas tend to occur,” he says. This information can be used to better negotiate cash rents fair to both the landowner and farmer, he says.
Buying an unmanned aerial vehicle (UAV or drone) also pays, says Bob Nielsen, Purdue University Extension agronomist. It can be used to detect problems earlier rather than later in the year after harvest is complete.
“I am convinced that a farmer who buys a UAV could get the investment back in a year,” he says.
11. Consider Consumer Tastes
Younger U.S. consumers tend to be less concerned about food prices and more concerned about quality and sustainability. This trend can open markets for farmers.
“We have to focus on adding value, knowing what customers like, and selling at a price they are willing to pay,” Henderson says. “I like my food cheap and plentiful. But how many millennials are clamoring for buffets these days? Let’s give them what they want but make them pay for it.”
This isn’t just about human food; it’s about breaking out of the commodity mind-set, he says. An example is growing orange corn. This type of corn is used in making deer attractants.
“This isn’t just about ethanol,” he says.